Depending on your tax situation, continuing to make traditional IRA contributions after the RMD age may make sense.
The demise of the stretch IRA and the postponed required minimum distribution garnered the majority of discussion in retirement and tax planning circles following the passage of the Secure Act, a comprehensive piece of retirement legislation in the final days of 2019.
However, a related clause that got less notice permits account holders to keep funding traditional IRAs after the age of 72 as long as they have earned income. Before the Secure Act was passed, anyone who was 70 1/2 years of age or older and of RMD age could not make contributions to a traditional IRA. (It has long been legal to contribute to a Roth IRA at any age, provided that the contributor or their spouse satisfies the earned income requirement.) ).
The fact that Americans are working longer than ever is acknowledged by the raising of the age limit for traditional IRA contributions and the delaying of the first-time RMD deadline. More than half of all adults over 65 were either employed or looking for work in 2019. This is almost twice as many as the percentage of adults 65 and older who were employed in 2019, according to data from the Bureau of Labor Statistics.
People are working longer because longevity rates are rising and pension coverage is dropping, both of which put strain on retirement funds. It’s also important to remember, though, that individuals 65 and older who work longer hours these days are typically wealthier, healthier, and more educated than 65-year-olds as a whole. The new rules regarding age limits for traditional IRA contributions and delayed RMDs are as follows: older workers who are more affluent are less likely to need to take their RMDs and are also more likely to have the extra money available to them to make additional contributions after they start earning income.
Though older workers, including those who must take required minimum distributions (RMDs), can make traditional IRA contributions, is it wise to do so given that RMDs must be paid out at the same time as the new contributions?
The short answer is that there are a few, but not many, circumstances in which making more traditional IRA contributions after RMD age makes sense.
Required Minimum Distributions (RMDs)
Once you reach age 72 (73 in 2023), you are required to start taking RMDs from your traditional IRA. This means that you must withdraw a certain amount of money from your IRA each year, regardless of whether you need the money or not. The amount of the RMD is based on your life expectancy and the balance of your IRA.
Roth IRAs
There are no RMDs for Roth IRAs. This means that you can continue to contribute to your Roth IRA even after you reach age 72 (73 in 2023). You can also leave the money in your Roth IRA and allow it to grow tax-free for as long as you live.
Other Age-Related Rules
There are a few other age-related rules that you should be aware of when it comes to IRAs:
- You must be at least 18 years old to open an IRA.
- You can contribute to an IRA until the year you turn 70 1/2 (71 1/2 in 2023).
- You can make catch-up contributions to your IRA if you are 50 or older.
Should You Contribute to an IRA After You Reach Retirement Age?
Whether or not you should contribute to an IRA after you reach retirement age is a personal decision. There are a few factors to consider, such as your income, your tax situation, and your retirement goals.
If you have a high income, you may not be able to deduct your IRA contributions on your taxes. This means that you would not get any tax benefit from contributing to an IRA.
If you are in a high tax bracket, you may want to consider contributing to a Roth IRA instead of a traditional IRA. This is because you will not have to pay taxes on the money when you withdraw it in retirement.
If you are not sure whether or not you should contribute to an IRA after you reach retirement age, you should talk to a financial advisor. They can help you weigh the pros and cons and make the best decision for your situation.
Additional Information
Here is some additional information about IRAs:
- IRAs are a great way to save for retirement.
- There are two main types of IRAs: traditional IRAs and Roth IRAs.
- Traditional IRAs offer tax-deferred growth.
- Roth IRAs offer tax-free growth and withdrawals.
- You can contribute up to $6,500 to an IRA in 2023 ($7,000 in 2024).
- You can make catch-up contributions to your IRA if you are 50 or older.
- You must start taking RMDs from your traditional IRA once you reach age 72 (73 in 2023).
- There are no RMDs for Roth IRAs.
There is no age limit on making regular contributions to traditional or Roth IRAs. However, there are some other age-related rules that you should be aware of, such as RMDs. Whether or not you should contribute to an IRA after you reach retirement age is a personal decision. You should talk to a financial advisor to help you weigh the pros and cons and make the best decision for your situation.
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Should You Make IRA Contributions After RMD Age?
Thus, the age restriction on traditional IRA contributions has been lifted, allowing for contributions at a later age. However, should you contribute to an IRA if you are able to, or would it be better to save money in a taxable account?
In general, the tax benefits of using any kind of tax-sheltered savings vehicle increase with the length of the holding period. For example, young savers have many years to profit from their money’s tax-deferred compounding. In the case of deductible contributions, they are not only able to stash away assets without paying taxes on them, but they also won’t be responsible for paying taxes on the money year over year. Contributions made through Roth accounts will have tax-free compounding in the years preceding retirement, as well as the ability to take tax-free withdrawals from the account at that time. The benefit of employing a tax-sheltered wrapper in terms of tax savings increases with the length of the holding period.
Due to a domino effect, contributions made to IRAs later in life receive less tax-sheltered compounding than contributions made earlier. This is because the investment gains are smaller and the taxes owed on them are also smaller with a shorter time horizon. For older adults who have earned income, using IRAs for additional savings later in life has tax benefits and is frequently preferable to investing in a taxable brokerage account, though those benefits are typically small.
Furthermore, because traditional IRA contributions are subject to RMDs that are eventually taxable, investments in traditional IRAs profit even less from that tax-sheltered compounding than do contributions to Roth IRAs. After reaching RMD age, traditional IRA contributions are “a little bit like a revolving door of IRA money,” according to tax and financial planning expert Jeffrey Levine. ”.
On the other hand, contributions made to a Roth IRA later in life have the potential to increase past the RMD age. Contributions to a Roth IRA are a wise option for individuals who are primarily saving for their heirs and do not anticipate using the funds during their own lives, as they are not subject to required minimum distributions (RMDs). Additionally, the tax advantages are distributed over a significantly longer period of time. Similarly, if an older worker has earned income, she can continue to contribute to company retirement plans like 401(k)s and won’t be required to take RMDs as long as she works. Additionally, unlike IRAs, contributions to company retirement plans are not subject to income limits.
At What Age Can You No Longer Contribute To An IRA
FAQ
Can a 75 year old contribute to an IRA?
Can I contribute to an IRA if I am retired?
At what age can you no longer take out an IRA?
Can I contribute to an IRA if I am on Social Security?
Do IRA contributions have a age limit?
Yet, even as the Secure Act lifts the age limit on traditional IRA contributions, IRA contributions still carry strictures. Having earned income is the first one: Your income from paid work in the year for which you’re making the contribution must be at least equal to or above the amount of the contribution. Note that spousal income counts.
What is the age limit for a Roth IRA?
Traditional IRAs: Although previous laws stopped traditional IRA contributions at age 70.5, you can now contribute at any age. However, required minimum distribution (RMD) rules still apply at 73 in 2023 and 2024, depending on when you were born. Roth IRAs: Like their traditional counterpart, there is no age limit of Roth IRA contributions.
Can you still contribute to a traditional IRA after age 72?
But a related provision that received less attention allows account owners to continue making contributions to traditional IRAs after age 72, provided they have earned income. Prior to the Secure Act’s passage, people couldn’t contribute to a traditional IRA if they were of RMD age or older: 70 1/2.
Can I contribute to a traditional IRA if I’m 70 12?
Prior to the passing of the SECURE Act in 2019, contributions to traditional IRAs were banned beyond age 70 ½, but that is no longer an issue. You can now contribute to a traditional or Roth IRA no matter your age.